“Rapid7 had a great third quarter reflecting strong performance across the board” said Corey Thomas, President and CEO of Rapid7. “As security teams with limited resources try to manage increasing workloads driven by a more complex ecosystem, and a rising threat environment, our customers are seeking solutions to help them streamline their processes, reduce risk and quickly respond to issues. With the launch of InsightConnect and the acquisition of tCell, we are executing on our vision to expand our best-of-breed platform, which helps customers not only identify security problems but also resolve them more efficiently.”

-- Total revenue for the third quarter of 2018 was $62.4 million. -- For the third quarter of 2018, GAAP loss from operations was $(11.3) million and non-GAAP loss from operations was $(2.8) million. -- For the third quarter of 2018, GAAP net loss was $(11.8) million or a GAAP loss per share of $(0.25) and non-GAAP net loss was $(2.1) million or a non-GAAP net loss per share of $(0.04). -- Adjusted EBITDA was $(1.1) million in the third quarter of 2018. -- For the third quarter of 2018, total revenue from North America was $53.2 million and comprised 85% of total revenue. Total revenue from the rest of world was $9.2 million and comprised 15% of total revenue in the third quarter of 2018. -- Cash flow from operating activities was $(4.1) million for the third quarter of 2018, compared to $5.7 million for the third quarter of 2017. Cash flow from operating activities was $(5.9) million in the first nine months of 2018, compared to $5.1 million in the first nine months of 2017.

Third Quarter 2018 Financial Results (under ASC 605)

-- Total revenue for the third quarter of 2018 was $65.5 million, an increase of 30% year-over-year. -- For the third quarter of 2018, GAAP loss from operations was $(10.0) million, compared to GAAP loss from operations of $(13.0) million in the third quarter of 2017. For the third quarter of 2018, non-GAAP loss from operations was $(1.5) million, compared to non-GAAP loss from operations of $(6.8) million in the third quarter of 2017. -- For the third quarter of 2018, GAAP net loss was $(10.5) million or a GAAP loss per share of $(0.22), compared to a GAAP net loss of $(10.3) million or a GAAP loss per share of $(0.24) for the third quarter of 2017. For the third quarter of 2018, non-GAAP net loss was $(0.8) million or a non-GAAP net loss per share of $(0.02), compared to a non-GAAP net loss of $(6.6) million or a non-GAAP net loss per share of $(0.15) for the third quarter of 2017. -- Adjusted EBITDA was $0.2 million in the third quarter of 2018, compared to adjusted EBITDA of $(5.6) million in the third quarter of 2017. -- For the third quarter of 2018, total revenue from North America increased 29% year-over-year to $55.4 million and comprised 85% of total revenue. Total revenue from the rest of the world increased 33% year-over-year to $10.1 million and comprised 15% of total revenue for the third quarter of 2018.

Recent Business Metrics and Highlights

-- Annualized recurring revenue (ARR) for the third quarter of 2018 was $217.4 million, an increase of 46% year-over-year. -- Our renewal rate for the third quarter of 2018, which includes upsells and cross-sells of additional products and services, was 120%. The expiring renewal rate, which excludes upsells and cross-sells of additional products and services, was 90% in the third quarter of 2018. -- 82% (under ASC 606) and 81% (under ASC 605) of total revenue in the third quarter of 2018 was recurring revenue, which is comprised of content subscriptions, maintenance and support, cloud-based subscriptions, managed services subscriptions, and term licenses, up from 71% (under ASC 605) in the third quarter of 2017. Recurring revenue increased 48% year-over-year. -- 85% (under ASC 606) and 87% (under ASC 605) of total revenue for the third quarter of 2018 came from deferred revenue on the balance sheet at the beginning of the quarter. -- Ended the third quarter of 2018 with 7,400 customers, an increase of 10% year-over-year. -- Calculated billings were $61.1 million (under ASC 606) and $61.0 million (under ASC 605) for the third quarter of 2018, an increase of 4% year-over-year. Growth in calculated billings was depressed by a decrease in weighted average contract lengths from 23 months to 17 months year-over-year as we shift the business towards recurring revenue, and a decrease in professional services billings. During the transition to a more subscription-based model, we believe calculated billings will be a less meaningful metric for our operations. -- In August 2018, we issued $230.0 million aggregate principal amount of 1.25% convertible senior notes due August 2023. The total net proceeds from the offering, after deducting initial purchase discounts and estimated debt issuance costs, was $223.1 million. In connection with the issuance of these notes, we paid $26.9 million for capped call transactions with certain counterparties, which are expected to offset the potential dilution to our common stock upon any conversion of the notes. -- In August 2018, we were recognized by Frost & Sullivan with its 2018 Global Vulnerability Management Market Leadership Award. -- In October 2018, we acquired tCell.io, Inc. (tCell), a leading provider of web application threat defense and monitoring, for total cash consideration of $14.4 million. -- In October 2018, we began the global rollout of InsightConnect, a security orchestration and automation solution that helps security teams reduce manual workloads, create efficiency without sacrificing control, and work more efficiently with IT and development teams. In addition, our InsightVM and InsightIDR solutions will include pre-built automation functionality for some of the most common use cases. -- Please see investors.rapid7.com for our Financial Metrics spreadsheet. -- For additional details on the reconciliation of non-GAAP measures to their nearest comparable GAAP measures, please refer to the accompanying financial data tables contained in this press release.

Fourth Quarter and Full-Year 2018 Guidance

For the fourth quarter and the full-year 2018 we will be providing guidance on an ASC 606 basis only.

Rapid7 anticipates total revenue, non-GAAP loss from operations, and non-GAAP net loss per share to be in the following ranges:

Guidance for the fourth quarter and full-year 2018 does not include any potential impact of foreign exchange gains or losses.

Non-GAAP guidance excludes estimates for stock-based compensation expense, amortization of acquired intangible assets, amortization of debt discount and issuance costs, and certain non-recurring items. Rapid7 has provided a reconciliation of historical non-GAAP financial measures to the most comparable GAAP measures in the financial statement tables included in this press release. A reconciliation of non-GAAP guidance measures to the most comparable GAAP measures is not available on a forward-looking basis without unreasonable efforts due to the high variability, complexity and low visibility with respect to the charges excluded from these non-GAAP measures.

Third Quarter 2018 Line Items Impacted by the Adoption of ASC 606

For the third quarter of 2018, we recognized revenue under ASC 606. For the third quarter of 2017, however, we recognized revenue under ASC 605. Therefore, the periods are not directly comparable. In addition, since we adopted ASC 606 using the modified retrospective method, we have presented in the table below, for the third quarter of 2018, a summary of certain consolidated financial statement line items impacted by the adoption of ASC 606 with a comparison of these line items to ASC 605.

Rapid7 will host a conference call today, November 6, 2018, to discuss its results at 4:30 p.m. Eastern Time. The call will be accessible by telephone at 877-357-4230 (domestic) or 629-228-0721 (international). The call will also be available live via webcast on the Company’s website at https://investors.rapid7.com. A telephone replay of the conference call will be available at 855-859-2056 or 404-537-3406 (access code 1228978) until November 13, 2018. A webcast replay will be available at https://investors.rapid7.com.

About Rapid7

Rapid7 (Nasdaq:RPD) powers the practice of SecOps by delivering shared visibility, analytics, and automation that unites security, IT, and DevOps teams. The Rapid7 Insight platform empowers these teams to jointly manage and reduce risk, detect and contain attackers, and analyze and optimize operations. Rapid7 technology, services, and research drive vulnerability management, application security, incident detection and response, and log management for 7,400 organizations across more than 120 countries, including 52% of the Fortune 100. To learn more about Rapid7 or join our threat research, visit www.rapid7.com.

Non-GAAP Financial Measures and Other Business Metrics

To supplement our consolidated financial statements, which are prepared and presented in accordance with generally accepted accounting principles in the United States, or GAAP, we provide investors with certain non-GAAP financial measures and other business metrics, which we believe are helpful to our investors. We use these non-GAAP financial measures and other business metrics for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons. We also use certain non-GAAP financial measures as performance measures under our executive bonus plan. We believe that these non-GAAP financial measures and other business metrics provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to metrics used by our management in its financial and operational decision-making.

The presentation of non-GAAP financial information and other business metrics is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with GAAP. While our non-GAAP financial measures and other business metrics are an important tool for financial and operational decision-making and for evaluating our own operating results over different periods of time, we urge investors to review the reconciliation of these financial measures to the comparable GAAP financial measures included below, and not to rely on any single financial measure to evaluate our business.

Adjusted EBITDA (non-GAAP). Adjusted EBITDA is a non-GAAP measure that we define as net loss before (1) interest income, (2) interest expense, (3) other income (expense), net, (4) provision for (benefit from) income taxes, (5) depreciation expense, (6) amortization of intangible assets, (7) stock-based compensation expense, and (8) certain non-recurring items. We believe that the use of adjusted EBITDA is useful to investors and other users of our financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across companies and across periods. Adjusted EBITDA should not be considered as a substitute for other measures of financial performance reported in accordance with GAAP. There are limitations to using this non-GAAP financial measure, including that other companies may calculate this measure differently than we do, that it does not reflect our capital expenditures or future requirements for capital expenditures and that it does not reflect changes in, or cash requirements for, our working capital and excludes some items that are cash based.

We also monitor operating measures of non-GAAP gross profit, non-GAAP operating loss, non-GAAP net loss and non-GAAP net loss per share. These non-GAAP financial measures exclude the effect of stock-based compensation expense, amortization of acquired intangible assets, amortization of debt discount and issuance costs and certain non-recurring items such as acquisition-related expenses, secondary public offering costs, and litigation-related expenses. We exclude litigation-related charges or benefits as well as legal costs associated with significant legal matters, because we do not believe they are reflective of on-going business and operating results. We believe that these non-GAAP financial measures provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to metrics used by our management in its financial and operational decision-making. While our non-GAAP financial measures are an important tool for financial and operational decision-making and for evaluating our own operating results over different periods of time, you should review the reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures included below, and not rely on any single financial measure to evaluate our business.

Annualized Recurring Revenue (ARR). ARR is a financial measure that we define as the annual value of all recurring revenue related contracts in place at the end of the quarter. ARR should be viewed independently of revenue and deferred revenue as ARR is an operating metric and is not intended to be combined with or replace these items. ARR is not a forecast of future revenue and can be impacted by contract start and end dates and renewal rates, and does not include revenue reported as perpetual license or professional services revenue in our consolidated statement of operations.

Calculated Billings (non-GAAP). Calculated billings is a non-GAAP measure that we define as total revenue recognized in accordance with GAAP plus the change in deferred revenue from the beginning to the end of the period. Historically, we have considered calculated billings to be a useful metric for management and investors, as a supplement to the corresponding GAAP measure of total revenue, because billings drive deferred revenue, which is an important indicator of the health and visibility of trends in our business. With the expansion of our subscription, cloud-based product offerings (InsightVM, InsightIDR, InsightAppSec, InsightOps, and InsightConnect) on the Insight platform, the shift of our other products to subscription pricing, and the shift of our sales compensation plans to ARR, we believe calculated billings is a less meaningful metric for our operations. Our use of calculated billings has limitations as an analytical tool and should not be considered in isolation or as a substitute for revenue recognition or revenue measurement, or an analysis of our results as reported under GAAP. Also, it is important to note that other companies, including companies in our industry, may not use calculated billings as a measure of their business, may calculate billings differently, may have different billing frequencies, or may use other financial measures to evaluate their performance, all of which could reduce the usefulness of calculated billings as a comparative measure.

While a reconciliation of non-GAAP guidance measures to corresponding GAAP measures is not available on a forward-looking basis as a result of the uncertainty regarding, and the potential variability of, many of these costs and expenses that we may incur in the future, we have provided a reconciliation of historical non-GAAP financial measures and other business metrics to the nearest comparable GAAP measures in the accompanying financial statement tables included in this press release.

Cautionary Language Concerning Forward-Looking Statements

This press release includes forward-looking statements. All statements contained in this press release other than statements of historical facts, including, without limitation, statements regarding demand for our product and service offerings, guidance for the fourth quarter and full-year 2018, expected benefits, features and availability of InsightConnect and automation functionality in InsightIDR and InsightVM, and the potential benefits of the acquisition of tCell, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “will” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks and uncertainties, including, without limitation, risks related to our rapid growth and ability to sustain our revenue growth rate, the ability of our products and professional services to correctly detect vulnerabilities, competition in the markets in which we operate, market growth, our ability to innovate and manage our growth, our ability to integrate acquired operations, our ability to operate in compliance with applicable laws as well as other risks and uncertainties set forth in the “Risk Factors” section of our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission for the quarter ended June 30, 2018 filed with the Securities and Exchange Commission on August 7, 2018, and subsequent reports that we file with the Securities and Exchange Commission. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, we cannot guarantee future results, levels of activity, performance, achievements or events and circumstances reflected in the forward-looking statements will occur. We are under no duty to update any of these forward-looking statements after the date of this press release to conform these statements to actual results or revised expectations, except as required by law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this press release.